pay cut

Here’s 10 Ways to Handle a Pay Cut

May 15, 2020 By Tamila McDonald Leave a Comment

Due to the coronavirus pandemic, over 33 million Americans have lost their jobs. But that’s only the tip of the iceberg. Some companies – in a valiant attempt to keep their employees on staff – issued massive pay cuts to make ends meet. Even medical professionals aren’t immune, with 21 percent of doctors either seeing their wages slashed or being furloughed. Figuring out how to handle a pay cut is daunting. But there are some steps that can help. If you’ve got to deal with an income reduction, here are ten ways to make the situation easier to manage.

1. Create a Financial Emergency Budget

Many households have expenses they can slash in an emergency. Avoiding food from restaurants, eliminating cable, cutting back on streaming services, and similar moves can all make a difference.

If you need to be more aggressive, you can go even more bare-bones. For example, find opportunities to shrink your grocery bill by eliminating convenience foods, focusing on sale items, and embracing coupons. You could also ditch any purchased drinks and choose to drink tap water from home instead.

Your goal should be to focus on necessities first. Prioritize critical budget items like housing, utilities, essential food, and basic transportation. That way, you can make sure your money can sustain everything critical above all else. After that, account for any debt payments and recurring expenses (like insurance) that you need to cover.

If your new paycheck won’t handle your debts, then reach out to your lenders. Explain your pay cut and ask if they have any assistance programs. They may be able to lower your bill, at least for a while, or place you in a forbearance program, either of which can buy you some time and preserve your credit.

2. Tap Your Emergency Fund

If you’ve revamped your budget and spoken with your lenders, and are still coming up short, then tapping your emergency fund could be an option. It would give you a source of cash to cover any shortfalls, which is genuinely that savings account’s purpose.

However, it’s wise to only use this approach while seeking out an alternative. Unless your emergency fund is especially large, it may not last long. As a result, it’s best to use this as an interim solution, ensuring you have time to find a way to increase your income or have your original salary rate restored.

3. Sell Your Extra Stuff

While the coronavirus is essentially eliminating garage sale season this spring, that doesn’t mean you can’t sell some extra stuff to bring in more cash. Apps like Letgo are still running. Similarly, there’s always Craigslist and Facebook selling groups.

If you have an item that still has value, consider listing it. If the price is reasonable, you might be able to snag a buyer.

4. Launch a Side Hustle

Many side hustles require very little starting equipment and can be done from home. If you have the right skills, you can pick up some extra projects, allowing you to make up for some of your lost income.

Writing, web development, graphic design, and a slew of other skill areas all translate well to a purely online arrangement. Consider which of your skills could work in the digital landscape and then try platforms like Upwork and Fiverr to find people looking for what you have to offer.

5. Pause Your Investments

If you need to free up some cash, consider putting the pause on investing. Unless your brokerage requires a minimum monthly deposit to maintain your account type, there’s no reason not to step away for a moment. Usually, pay cuts aren’t permanent situations. Once your circumstances improve, you can always start up again.

6. Adjust Your Long-Term Goals

Sometimes, making ends meet after a pay cut isn’t an issue. However, that doesn’t mean you don’t have to reconsider how you save if you want to remain in good shape.

If maintaining your current savings rate is challenging, reassess your long-term goals. For example, you may need to take a break from saving for a house or another objective that typically takes time. Alternatively, lowering your monthly deposit could be enough, particularly if you just need a little breathing room.

Ideally, you don’t want to walk away from saving for retirement. If your contributions are tied to your paycheck, then that likely isn’t an issue. But if you were using an IRA, you may be tempted to take a break. While this can be a reasonable move if you’re in dire straits, if it isn’t a necessity, it’s usually best to make this form of long-term savings a priority over others.

7. Get a Roommate

Sometimes, finding ways to split household costs is the easiest way to get some space in your budget. If you know someone who is in a similar situation, it might be wise to join forces as roommates. That way, you have another person who is assisting with critical costs. Plus, you’ll both likely experience some financial benefits from the arrangement.

8. Sign Up for Partial Unemployment

If your hours were reduced significantly, you might be eligible for partial unemployment benefits. If you qualify, you can get an unemployment check to help cover some of your lost wages. Usually, it won’t make up for the entire shortfall, but it can make a difference.

It’s important to understand that partial unemployment eligibility requirements vary from one state to the next. You’ll need to review the details of your local program to see if you may be able to access those benefits.

9. Get a Part-Time Job

If your pay cut came with a reduction in hours, it might be wise to explore part-time opportunities that can help cover the difference. For example, even during the coronavirus pandemic, stores like Walmart and Safeway are hiring. While the wages may be lower than what you were previously making per hour, it could help during trying times.

10. Find a New Job

At times, pay cuts aren’t short-term. If it looks like your income from your employer won’t improve any time soon, then it may be wise to explore other options.

Depending on your skill set, this could be relatively simple. If what you have to offer is in-demand, you could snag a new position fairly quickly. Then, once you have a firm offer and start date in hand, give your notice to your current employer and head toward greener pastures.

Do you have any other tips that can help people handle a pay cut? Share your thoughts in the comments below.

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12 Reasons to Consider a Pay Cut

March 30, 2017 By Jennifer Derrick 19 Comments

We are almost hardwired to pursue ever increasing pay levels. Each job should, ideally, give us a salary bump. Yearly evaluations should result in increased wages. In pursuit of ever higher pay, we sometimes miss out on opportunities in life that require us to take a pay cut or to forego money entirely for a time. But to pursue anything other than higher pay goes against what we’ve been taught. But is a pay cut always a bad thing? Not necessarily. Even involuntary pay cuts can turn into blessings.

Reasons to Consider a Pay Cut

Taking a pay cut is never easy but if you have sound reasoning behind it, it could change your life for the better. Now, if you need every cent you currently make the thought of any reduction in pay can bring on panic. But for many of us there is some room to do things that pay less than our current jobs, or to forego a raise if we can get something even more valuable. Here are some reasons to consider a pay cut:

To take a job you love: If you have the chance to do work you love, to work with people you love, or in a place you love but you have to take a pay cut, you have to ask yourself which is more important: Overall happiness or money.
To start your own business: If you want to go out on your own, you’ll probably have to work for less than you’re used to, at least in the beginning. The upside is that you may end up making far more later on and you’ll be doing work that means something to you.
To get better hours: If taking a pay cut means that you can stop working nights, weekends, uncompensated overtime, or holidays, it may be worth it if you value free time and normal hours over money.
To trade pay for more vacation time or other benefits: Sometimes a job offer will come with less pay, but better benefits such as more vacation, better insurance, a good employer 401k match, or stock options. In this case you may find that, although your actual pay has gone down, your overall compensation has increased. If these benefits are worth it to you, the pay cut is a good idea.
To take a sabbatical: You may reach a point where you decide to take the family to live in Europe for six months or to pursue some long held dream. You may not have to quit your job, but you will likely have to agree to greatly reduced pay, or no pay at all. If the reason for the sabbatical is important to you, giving up your pay may be the only way to go.
To move to a lower cost of living area: If you want to move to an area with a lower cost of living, you’ll likely have to take a pay cut. The good news is that you won’t need as much money since your living expenses will be reduced in the new area. This can result in a much bigger savings opportunity over the long term.
To take a “learning job”: If you want to change careers, you’ll probably have to take a pay cut to get your foot in the door with an entry level job. However, you’ll be learning the ropes of your new career so it may result in more opportunities later on.
To get a job in lean times: In tough economic times you may have to take a pay cut just to get a job. When jobs are hard to come by, you may have to take what’s offered no matter the pay. Some pay may be better than none.
To keep a job in lean times: In tough economic times, many employers slash or freeze pay. If your only choice is to quit without another job lined up, you may have to just take the cut until things turn around.
To get a shorter commute: A shorter commute can save you a ton of gas money. If you can get a shorter commute your lower pay may be offset by your gas savings. You’ll also have more free time and maybe be able to sleep a little longer in the morning. That’s worth more than money.
To get a better chance to move up: If your current job doesn’t have many opportunities for advancement, you may have to find another employer. This can result in a pay cut, but if there are more opportunities for advancement you may be better off in the long run.
To save your health (physical or mental): If you hate your job or your boss is a toxic SOB, you may be better off taking a pay cut to go somewhere else. Your mental health is worth more than money. Similarly, if your job isn’t safe or you work around toxic materials, you may be better off leaving to do something else. You can’t replace your physical health.

Not everything has to be about money. Yes, it’s nice to get a raise. Extra money can give you more breathing room or a chance to afford some things you’d like to have. However, there are cases, unique to every individual or family, where a pay reduction may not be the disaster that we’ve been taught it is.

Photo: José Carlos Cortizo Pérez

Adjusting to a Pay Cut

May 23, 2011 By Jennifer Derrick Leave a Comment

Last week I wrote about cases where taking a pay cut might make sense. This week I want to give some suggestions for how you can adjust to a decrease in pay. Some pay cuts will require no adjustment, or very little. If you take a pay cut but get a shorter commute, move to a lower cost of living area, or get better/cheaper insurance, you may find that your savings offset the loss in pay. For other types of cuts, you may have to make some adjustments.

First and foremost, if the cut will be voluntary (you’re starting a business, changing careers, or taking a sabbatical, for example) save up as much cash as possible before you make the move. This will give you a reserve to fall back on if things don’t go as planned. Other tactics you may have to employ are discussed below.

Downsize: You may have to downsize your lifestyle while you adjust to living on less pay. This can mean small changes like eating out less, dropping services, having a yard sale to raise money, or buying fewer unnecessary items. It may also mean bigger changes such as moving to a smaller home, selling expensive cars for cheaper models, pulling kids out of private schools, or taking fewer/cheaper vacations. The amount of downsizing you’ll need to do will depend upon the amount and duration of the pay cut, as well as how much cash you have in reserve and how close to your income you were living before the cut. If you were living right at the limit of (or above) your income, you’ll probably need to cut back more than the person who was already living frugally.

Move: You may not only need to a move to a smaller house or cheaper neighborhood, you may need to move to another area altogether. This is something that people often don’t want to think about but which may be necessary. You may have to look at lower cost of living areas, especially if you can’t deal with the cut in any other way and you see no chance of your income returning to what it once was.

Prepare to answer questions from potential employers: If you’re intentionally seeking a job that pays less so that you can change careers or work fewer hours, you’re going to have to answer uncomfortable questions form potential employers who think you are likely to bolt for higher paying work. You’ll also have to answer questions in the future from employers who want to know why you left a high paying job for a lower paying one. Your drop in pay will be part of your salary history and you’ll be expected to address that. Have your answers ready and offer an explanation as to why you wanted or were forced to be paid less.

Deal with the emotional fallout: Even if you willingly choose to take a lower paying position it can be hard to adjust emotionally. If you’re used to making $200,000 per year and suddenly you’re working for $50,000, it can make you feel less valuable. Even if you’re enjoying the work and are generally happy, it can still be an adjustment. Don’t define yourself by your paycheck. If you’re happy and able to make a decent living, try to let it go.

Deal with the societal fallout: People who “knew you when” will be curious as to why you are making less. If you’ve chosen this path, they may look at you strangely. People don’t always understand why someone would choose things other than money. Snootier people may look down on you if you sell your McMansion and move into a smaller place so you can do something more meaningful. Even if you are forced into a pay cut, less sympathetic people may ask things like, “So, when do you think you’ll be rejoining the country club?” You’re not obligated to answer any questions. You can simply change the subject or say nothing. If your friends give you too much grief, it may be time to make them former friends. Don’t let people’s opinions bother you.

Taking a pay cut, whether voluntarily or involuntarily, can require some adjustments. Those adjustments may involve more than budgets and numbers. You may have to rethink how you feel about yourself and deal with people who don’t understand your position. This can be unexpected and add to the stress of the situation. Prepare yourself as much as possible to deal with these things and you’ll adjust to your new situation much more easily.

A Life Without Debt: Surviving the Pay Cut Made Easier

January 26, 2010 By Sadie Morris 7 Comments

A couple of weeks ago we got the news that the company my husband works for is cutting pay by twenty percent for all employees, for an indefinite period of time. Once I got past the anger and frustration, I took stock of our situation and worked on damage control. While we do have a large emergency fund, I don’t want to touch it unless we have no other choice. Yes, a pay cut could be construed as an emergency, but I think the problem can be addressed through other means. It’s not like we will have no income coming in; we’ll just have less. I decided that I’d also prefer not to lower our savings rate if I can avoid it. And for sure I don’t want to incur any debt. These goals should be attainable with careful planning and spending. Since we already live below our means, surviving this pay cut with minimal damage should only involve adjusting our spending to compensate for the lower level.

While this pay cut is supposed to be short term, I’m acting as though it will be long term. Why? Because I don’t trust that this company will be able to turn things around in the short term and, even if they can, I don’t trust that they won’t just keep pay at a reduced level to save more money. If I’m wrong that will be great, but if this cut drags on for months or even a year, I’ll be prepared because from day one I acted as though our newly reduced income was permanent. I won’t be caught short because I tried to keep my life going on the higher income. We will be living on the reduced number, not borrowing from savings or credit cards trying to support a more expensive lifestyle.

The first thing I did was to pull up our records in Quicken. This pay cut will bring us back to what we were making about six years ago. That’s a huge ouch, but it was also comforting to look back at 2004’s records and see that we were making it just fine then. We were still debt free and we were even managing to have a little fun at the time. Granted, we weren’t able to save as much or to travel as much as we have been recently, but our life wasn’t terrible, either. I know from looking at my old records that we will survive this. That brought my blood pressure down a good twenty points and allowed me to focus on what needed to be done next.

The next thing I did was to look into the future for big expenses coming up that might leave us short. Fortunately, most of the big stuff has been paid for the year. We did have a vacation planned for next month that I cancelled. We were still within the window to get our deposits back, so that money will come in handy for other things. We could have gone on the trip and taken the money out of savings, but that’s not the responsible way to deal with the current problem. Our destination will still be there when pay returns to normal and we can go then, confident that we won’t need the money for something else.

I also called and shopped our insurance policies and negotiated new deals on some of our other services. This is something I should do regularly, but I had gotten lax and not done it for a couple of years. I was able to slash our insurance by an average of $100 per policy, which will make a big difference over the coming months. I was also able to negotiate a better deal on our phone/Internet bundle that will save us about $30/month. There are now no huge expenses looming on the horizon and those that will come later will be less, so this gives us a chance to adjust to the new income level.

Next I looked at our day to day spending. While we’ve remained relatively frugal we have gotten lazy in some areas. Eating out, entertainment, and other fun expenses have crept up over the years. Most of those expenses can be slashed with little effort. We’ll just be staying home more or looking for more free alternatives. Netflix is now gone, and any magazine subscriptions won’t be renewed until things return to normal. The library can handle my magazine needs for free, and DVD’s can be borrowed, too. I will also be tightening the grocery budget. Over the years we’ve begun buying some more expensive products and brands. I will go back to the cheaper alternatives. I’m also planning to increase the size of my garden this summer to further reduce grocery costs. There is also room to conserve more fuel, electricity, and water in this house. We’ve gotten complacent and comfortable over the years and we’ve relaxed some of our spending. I look at this pay cut as a challenge to get back to some of my more frugal ways. It will probably good for me to get those super frugal muscles back into shape.

Finally I called in all the money I was owed from all sources. I collected from some clients that owed me money and had been dilly-dallying on the payment. I cashed in all of my rewards points and programs. I sent in all the rebates I had lying around. While it’s not enough to completely replace the lost income, it does add a good bit to the household accounts and gives us some extra leeway as we adjust to our reduced income level.

This is one of those times that our simple, debt free lifestyle has proven its worth. I know many other people at this company who are in full-on freak out mode right now. They already live above their means and are saddled with debt. Now that their means are reduced they are in a tailspin of financial trouble. Some just bought new cars or homes that they cannot afford on twenty percent less income. The debt collectors won’t wait for the pay cut to be lifted. If this pay cut drags on for months these people will be severely hurt.

We, on the other hand, will be inconvenienced and angry but our life will go on, just at a reduced level. We survived just fine on this income several years ago. We can do it again. If the pay cut drags on we may have to reduce our savings level and direct more money toward the household accounts, but we can spare it. We can get by without touching our current savings or taking on debt. Not having a huge debt load to service is such a relief at times like this. This is why we work so hard to stay debt free. Because when times like this come, it’s so much more bearable. I won’t be juggling bills and robbing our savings to pay credit card bills or loans. Simply adjusting our expenses and spending will be enough. As annoying as this is, I know it would be far worse with debt.